Thursday, April 8, 2010

Confessions of a Greek Canadian Skeptic

Canada's economic growth will outpace those of other G7 countries by a wide margin in the first half of the year, the Organization for Economic Development and Co-operation says in a new forecast. The OECD report released yesterday pegged first-quarter growth in Canada at 6.2 per cent on an annualized basis and forecast the economy would expand by 4.5 per cent in the second quarter. The group forecast overall growth among the G7 nations would slow in the first two quarters as government stimulus programs run their course and the jobs market remain fragile. Growth in the United States was forecast at 2.4 per cent in the first quarter and 2.3 per cent in the second.

Forget the fact that the Canadian dollar is hovering around parity, and might pass parity as early as Friday when Statistics Canada releases March employment numbers. The Bank of Canada has repeatedly warned that the appreciation of the CAD will hamper growth.

Business confidence among Canada’s small and medium-sized businesses continues to build on the momentum that has thus far characterized 2010. According to the latest business confidence survey findings from the Canadian Federation of Independent Business (CFIB), the Business Barometer index rose to 69.9 in March– its highest level in half a decade.

Ted Mallett, CFIB’s vice-president of research and chief economist, says that this level of optimism is consistent with a healthy, sustained economic growth rate of about 4 per cent, which suggests Canada’s strong economic rebound to date will continue.

“In a truly rare development, business confidence is highest in the retail sector (72.9), followed closely by wholesale (72.5) – suggesting that the consumer economy is powering forward and being spurred by low interest rates,” explained Mallett, adding that “manufacturers (71.8) are in positive stead despite a spirited loonie, and the rebound of confidence in the natural resources sector will be music to the ears of western economies.”

Although the farming and hospitality sectors are reporting lower than average levels of optimism, their seasonal dependence means that yearly performance will not be defined until the mid part of 2010.

The average prices for all key housing types rose more than 10 per cent on a national basis in the first quarter of this year, according to the Royal-Lepage House Price Survey.

BNN's Pat Boland said the numbers in Thursday's report point away from the idea that Canada is experiencing a housing bubble.

"People have been talking about bubbles in the real estate market, and those kinds of numbers across the whole country would indicate that that might not necessarily be the case," he told CTV News Channel Thursday.

Although the national housing prices have grown at a moderate rate year over year, the Royal-Lepage survey shows housing prices in Vancouver and Toronto continue to climb at a dramatic pace.

The Royal Lepage survey found that the average price of detached bungalows in Toronto was $459,107 in the first quarter of this year, up 13.3 per cent from a year ago.

The price of standard two-storey homes in the city rose at roughly the same pace to $562,150, up 13.2 per cent from last year. Condominium prices were slower to grow: condo prices rose 10 per cent to $317,579.

In Vancouver, the housing market rose even more dramatically. The average price of a detached bungalow skyrocketed 21.8 per cent to $906,045. Two-storey home prices rose 19.2 per cent to $987,500 and condo prices were up 15.7 per cent from last year at $470,000.

But not all major Canadian cities have seen the same growth in housing prices.

Average housing prices in Montreal rose about seven per cent, with the average price of a bungalow rising 7.2 per cent to $249,172, the average price of a two-storey home growing 7.6 per cent to $355,109 and the average price of a condominium rose 7.6 per cent to $222,244, according to the report.

Phil Soper, president and chief executive of Royal LePage Real Estate Services, said the differences in housing prices between cities shows a difference in the way consumers have responded to the recession.

"House sale data from the past two year period shows tremendous variances in terms of how different cities reacted to the recession," Soper said. "In Vancouver and Toronto, for instance, the dramatic unit sales fluctuations exhibit a significant degree of market irrationality: inordinately fearful when faced with poorer markets; and overly enthusiastic when the tables turned. Montreal is an example of a city where the market has been much more stable and homeowners there seem quite happy with the relatively slow pace of change."

According to the Royal-Lepage Survey, the average price of a detached bungalow in Canada rose almost 11 per cent from last year to $329,209 in the first three months of this year.

Two-storey home prices rose 10.3 per cent to $365,141 and condo prices rose 10.9 per cent to $228,963.

I am very skeptical of Canadian residential real estate and Canadian growth leading the G7 economies (I think US growth will surprise to the upside and Canada's to the downside). One senior VP of a major Canadian pension fund had warned me a few months ago that they think Canada is the next big bubble. It sure looks that way, and as we all know, bubbles are hard to predict until they implode.

To be sure, Canada has solid fundamentals, but I think Garth Turner is right, spring fever and house lust is getting out of control. Interestingly, without announcing last call, Canadian banks have taken the punch bowl away from the mortgage party that millions have enjoyed, and hangovers are looming:

The Conference Board of Canada released a report saying one-fifth of Canadians already cannot afford both good-quality housing and either nutritious food or healthy recreational activity.

And the Bank of Canada reported that if mortgage and consumer credit interest rates went up one per cent, a record-high 9.6 per cent of households would be deemed financially vulnerable.

The Canadian housing market makes me nervous. That, and the inflated loonie which risks overshooting parity (I'd start shorting the CAD like crazy if it ever breaks above USD 1.05).

Funny, but when I call my sister and friends in Greece, they tell me that life in Greece hasn't changed much since the summer when I visited. Greeks are perennial complainers, but they're still going out and enjoying life. The coffee shops in Athens and other major cities are packed, and so are the restaurants and clubs.

The only thing that has changed is that when Greeks turn on the television and watch the news, the first thing that jumps out a them are the "spreads". One Greek commentator said "it's ridiculous, Greek spreads are trading higher than Mexico, Brazil, Egypt, and other countries that are not part of the EMU. Greek CDS spreads are even higher than Iceland right now".

I don't want to downplay Greece's fiscal woes, but if I were a pension fund manager, I'd be jumping on Greek bonds yielding 7%, as well as National Bank of Greece shares. I predict Greece will come through this crisis, and all the cynics who think otherwise, should pay careful attention to Trichet's comments below. Also, read Avery Shenfeld's weekly comment from CIBC, Greece and the Stress Test.

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I am an independent senior economist and pension and investment analyst with years of experience working on the buy and sell-side. I have researched and invested in traditional and alternative asset classes at two of the largest public pension funds in Canada, the Caisse de dépôt et placement du Québec (Caisse) and the Public Sector Pension Investment Board (PSP Investments). I've also consulted the Treasury Board Secretariat of Canada on the governance of the Federal Public Service Pension Plan (2007) and been invited to speak at the Standing Committee on Finance (2009) and the Senate Standing Committee on Banking, Commerce and Trade (2010) to discuss Canada's pension system. You can follow my blog posts on your Bloomberg terminal and track me on Twitter (@PensionPulse) where I post many links to pension and investment articles as well as my market thoughts and other articles of interest.

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